Gold Producers – Never has there been a better time to buy
For the last 2 weeks I have been trying to point out that the gold producers have the best risk adjusted value anywhere on the market. In this type of market I am looking for yield and guaranteed earnings growth. Certainly most producers won’t pay much a yield compared to others on the market, but with guaranteed earnings growth for at least the next 3 – 5 years... a well timed purchase may yield quite well when compared to book value on original purchase. Plus you get better than average capital gain potential than any other sector on the market presently. You also have downside stability with the obvious trend of gold going up over the long term. With too much liquidity in the system… it is now rushing to gold in times of crisis and not being liquidated which is an obvious sign of the underlying drivers for gold. Gold will go up and down yes and will probably fall dramatically once it touches the psychological mark of $2000. Don’t make a foolish mistake at that point… the run in gold is far from over.
Gold is in a bubble yes… but some bubbles last for years.
When developed nations have stable balance sheets and are not backed into a corner of keeping rates artificially low and printing money to purchase their own debt… then you might have a case for gold to downside. This debt situation may be with us for up to a decade depending on the outcomes of several scenarios. The fact of the matter is that none of the basic fundamentals have changed or look to be changing in the near future making the case for gold still extremely bullish. Ben may stall on the bond purchasing side of QE3 as long as possible which might put markets into a further tail spin, especailly with all the bad economic data coming out in the past 3 weeks and further European woes which are going to intensify this fall… the fact of the matter is that everything that is developing on the macro horizon will force the FED into another round of bond buying just too maintain debt servicing costs.
There has never been a better time to buy the producers as they represent extreme value. First, you have the double whammy growth story. You have 1) immediate earnings growth and you have 2) production growth as almost all gold companies are significantly ramping up production over the next 5 years. Second, you have extreme value with gold stocks trading at historical lows. On an earnings basis, on a cash flow basis, priced against gold, or even on a yield basis… the miners have never been cheaper. On a relative basis they are much cheaper than the developers.
How often do you get a theme like this?
- SUPER CHARGED EARNINGS POTENTIAL IN A GROWTH OREINTED INDUSTRY….
- AN INDUSTRY RAMPING UP PRODUCTION OVER NEXT 5 YEARS…
- AN INDUSTRY TRADING AT HISTORICAL VALUATION LOWS
Q3 earnings for many producers will be the best quarter yet for this asset class making it ridiculously undervalued. I expect earnings for many companies to grow at least another 50% and some producer’s earnings will grow 100% from this quarter to next if gold goes over $2000 and stays there this fall. Here is how good Q3 is starting to look. The price of gold has averaged $1681 over the last 6 weeks which represents the halfway mark of Q3. I can guarantee you gold will never see $1681 again. Undoubtedly it is on its way to $2000 before the end of the quarter and the way it is going it could get there as early as next week. Q3 costs should also come down as the price of oil has come off significantly which is a major operating cost for miners.
For the miners… the party is just getting started
Why do I think POG won’t come down? Gold is starting to turn into a demand story with no one selling. In addition the volume that made this latest historical push in August is not that much higher than the averages for the last 2 years signifying that this is not a blowoff top in POG. It signals all things normal on the volume front and that this is jsut more lack of sellers at the current price than any abnormal volume. There is still further momentum to the upside both short term and longer term.
Napkin Accounting Tells You BUY NOW!
A little tweaking of Goldcorp’s latest numbers should demonstrate this point. Assuming all things constant except gold sales… Goldcorp produced 597,100 ounces last quarter for net income of $420 million or $0.52 per share. At $1500 that produces $895 million in revenue. At $2000 that produces $1.194B in revenue. That is an additional $300 million in revenue that will flow directly in to the bottom line increasing net income to $720 million which is almost double. At $2000 gold sales, Goldcorp would have earnings over $4 a share. And that was a bad quarter production wise for G where everything that could go wrong went wrong.
Goldcorp is a bad example, they are one of the lowest cost producers in the industry so already have high margins with less earnings leverage.
Take Kinross who has average costs or bit below average costs for the industry.
K produced 676,245 ounces for the quarter at $513 on a by product basis which is $330 higher than G’s on a by product basis. K sold their Q2 ounces at $1450 for $980 million. At $2000 gold those ounces become $1.352B in revenue, an additional $372 million flowing to the net income category. Kinross had $226.5 million in net income which would put Kinross up to $600 million in net income more than doubling their profits for the quarter and increasing their EPS from under $1 to a whopping $2.10 per share in earnings. Implying that Kinross should at least double over the next 6 months as K is potentially trading at less than 7 times forward earnings of a less than half a year.
These companies are priced like no one wants them. Really, no one does want them with so many other financial products out there that reduce the risk dramatically than owning an individaul miner. This implies that you are getting there ahead of the herd. It is clear to me that on a risk adjusted basis... the miners now present the best opportunity. What would be great for the industry is if they made more ETF’s based on the miners and not just the top miners. Gold companies are some of the few companies that have any future over the next decade when it comes to growth of any sort. I cannot stress enough that the time to buy the miners is now. The only people that print real money nowadays are the gold miners.
Usually I like to find the gold discoveries or early stage development plays as they consistently provide the highest risk adjusted returns. Right now I feel the best gold development plays are at least fairly valued where the producers are much more undervalued for their assets, their growth potential and the fact that a gold company in production is much less risk than a deposit that is not in production, especially when it comes to financing and dilution. All developers have to go to production one day. Yes, mines have problems, but careful scrutiny of the company and its track record on delivering and its cost profile should eliminate a lot of this risk. The fact that gold will trade above $2000 all year in 2012 will also eliminate a lot of this production risk with the worst miners just not perfroming as well as the top miners.
The earnings leverage that these gold companies have to the price of gold will attract the herd at some point and it already looks like a few investment managers who were only holding bullion are now looking at the miners. All investment mangers queried admit that the miners are sickly cheap. All investment managers also admit spot getting risky to buy now. Certainly when you factor in leverage and potential short term price drop. The risk of getting creamed on spot at some time this fall is very high... it is way too much for the average investor to take on the spot market. Especailly if they haven't been holding gold under $500.
Put the two together and this is the no brainer trade for the rest of 2011 and going into 2012. I don’t care what the market does over that time… just like stocks have yield and will keep the market from crashing because treasuries are so low… this will be one of the only bright spots on the market while global debt woes continue... especially if economic conditions worsen which will exasperate the debt crisis. The time to buy the miners is now. Capital is risk adverse and there is now a perceived risk with a lot of assets... everything is relative where all currencies are losing value on a purchasing power basis. One day investors are going to get it... the idea that pretty much all developed world government debt is JUNK!!
NOW IS THE START OF A MAJOR MOVE IN THIS SECTOR. IT’S PRICED RIGHT AND THE EARNINGS STORY DOESN’T GET ANY BETTER.
With earnings set to double from Q2 to Q3 for many of these companies, there has never been a better time to own a gold miner. They are cheap and you are getting there just before the herd. Over the next year the best gains will be made in this sector. Once the majors are cashed up from fat profits over the next couple years… you will then see a major buying frenzy among producers, developers and explorers. They won’t be able to help themselves with all that money burning a hole in their pockets.
4 Keys to finding early stage highly production growth stories…
Already in production
- Earnings leverage
- Minimal dilution with revenue from existing operations
- Less financing risk
- Proven management
- Minimal production risk
- Key development asset
- Ability to expand maximize current operations
- Exploration potential of existing assets
- Low cost producers in the industry receive a premium
- Lower risk to gold price vs. high cost producer – long term value vs. leverage
- High grade or low grade… who cares? What I care about is how much it costs to pull that ounce out of the ground.
- Mines with longevity have value. Lots of value.
- If investors know you are not going out of business in 5 years, they are much more willing to park their butts at your AGM meetings
One often overlooked factor… companies whose sales and costs are denominated in USD have a decided advantage over operations in mineral currencies such as Canada and Australia.
My top gold producer over the next 5 years…
Gran Columbia Gold
Shares Out… 389M
Market Cap… $300 million
Initiating coverage @ $0.77
52 week high... $2.49
52 week low... $0.73
Gran Columbia has everything in place to be the next big producer and may be the South American version of Goldcorp one day. Gran Columbia is a leading gold producer in Columbia producing 120,000 oz’s by the end of 2011 from some of the deepest, richest mines in Columbia. GCM has the largest growth profile of any producer going from 120,000 ounces of gold in Q3 to 630,000 ounces per year by 2016. GCM has been in production since 2010 and a stage in start up operations where they are smoothing out efficiencies and maximizing initial start up operations. GCM isn’t receiving any value for its operations at Sergovia even though production costs will be around $600 which is below industry average of $700.
Kirkland Lake Gold KGI-T has a $1.25B market cap and is set to produce 130,000 ounces in 2012 at a cost of $750. This certainly seems like a price mismatch to me… KGI producing 130k ounces for $750/oz trading at $1.25B while GCM will produce $165k ounces by the end of 2012 at close to $600/oz trading at $300M. WOW.
I know some of you… or at least your wives will equate to this type of sale.
Ladies and gentlemen... GCM is trading at a 75% discount!
This is equivalent to HP blowing out their tablets for $100 this weekend. They were gone at Costco at open. (If you didn’t line up you didn’t get one.)
Most companies that produce 600,000 oz’s per year trade from a $5B - $10B market cap while tiny little GCM trades at a paltry $300M market cap so the growth profile for GCM is at least 20 to 3 times its current market cap holding arguably some of the best projects in Columbia which is has been and will continue to be the land of opporuntity for gold companies. GCM’s long term future is in the million ounce range with there underground operations having half a million ounce potential over the long run.
Columbia… the hottest ticket in Gold Development
Columbia is arguably the hottest ticket in gold exploration and development over the last few years with several major discoveries. My other big Columbia pick is Galway GWY-V at $0.90 who is an imminent takeout of Ike Batista, but they are a developer ... which not this months theme that I am trying to hammer home. The next stage for Columbia from discovery and development is to produce from these deposits and GCM is on the inside track in the lead at the quarter post. GCM is already producing, is at the stage where they are realizing operational efficiencies, is the leading Columbian gold producer and has a growth profile unlike any other miner in Columbia, or any where else in the world for that fact. With 2 major projects, one undergound high grade and one open pit bulk tonange low grade project, GCM has both ends of the spectrum covered when it comes to large scale lucrative mining projects.
The Segovia operations have a global resource base of close to 700,000 ounces in all categories grading between 13 and 15 g/t au. This is plenty to support current operations especially since the property has plenty of potential to grow the resource. The property has received little exploration since the mine was placed in receivership in 1989. Historically the area has produced more than 5M oz’s of gold in the last 150 years with an average grade of 9.3 g/t gold. The land package covers a vast area with potential to ramp up operations and expand beyond the current targets. Current mining only covers 4 of 29 known veins that have a total strike extent of over 50km on the property. The property is fully permitted, is close to excellent infrastructure and has access to power and water.
GCM is planning a 50,000 meter drill program to upgrade and expand the resource at Sergovia. GCM is increasing the mill capacity from 600tpd to 1200 tpd which will get GCM to over 100,000 oz’s per year and is considering adding a second mill to the site for longer term development plans which would put the site well over 200,000 oz’s per year.
Gran Columbia has another small operation at El Zancudo which is near their flagship development property Marmato. El Zancudo project has commenced trial mining with year end production estimated at 25,000’s andcosts at around $600 per oz. GCM is drilling 12,000 meters at this site looking for large near surface disseminated gold systems.
Marmato is Gran Columbia’s flagship asset for long term growth. It is expected to produce close to 500,000 oz’s a year once in full production. Marmato is a classic bulk tonnage open pit operation with an 18 year mine and still room to grow. It is a mammoth gold deposit containing 10M ounces of gold at just under 1 g/t gold and an additional 60M ounces of silver at a grade between 5 and 8 g/t ag. Cash costs are project at less than $500 per oz which will make GCM one of the lower cost producers in the industry similar to Kinross once all their projects are in production. With Marmato in production and Sergovia at full steam… Gran Columbia has a chance at being a million ounce gold producer in Columbia with attractive costs when compared to the industry.
GCM has the biggest growth profile of any miner
The growth profile of Gran Columbia is almost identical to a company I used to trade options of 6 years ago ELD-TO. Eldorado Gold went from being a 100,000 ounce producer to the 650 – 700 k ounces they currently produce and will be producing a cool million ounces by 2015. That took 10 years to go from 100,000 oz’s to a million ounces and GCM in my opinion has a chance to do it faster because it is all organic growth in a nation whose goldfields sat idle for 30 years. ELD’s cash costs are some of the lowest in the industry at around $400 per ounce which makes GCM very comparable once in full production.
Bottomline… I have never seen more of a ‘no brainer’ buy in the industry than Gran Columbia Gold. It is truly undervalued when compared to its peers trading at 25% the price of KGI and has a growth profile that goes from 100,000 ounces to 600,000 plus in 5 years. There is no other gold company that I have reviewed over the past year that fits my newsletter theme any better than GCM-TO.
It’s both stupidly cheap and has the highest growth rate of any producer I can find.
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